Why America has a debt ceiling: 5 questions answered

debt ceiling

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The statue of George Washington can be seen in the US Capitol Rotunda in Washington, DC.

Republicans and Democrats are once again preparing for a chicken game over the US debt ceiling – with the nation’s financial stability at stake.

The Treasury Department said on Jan. 13, 2023, it expects the U.S. to current debt ceiling of $31.38 trillion on January 19th. After that, the government will take “extraordinary measures” – which could extend the deadline to May or June – to avoid a default.

But it’s not clear if Republicans in the House of Representatives will agree to a debt ceiling lift without conditions — conditions President Joe Biden and Senate Democrats have announced their rejection. Right Republicans required that in exchange for electing Kevin McCarthy as Speaker of the House, he would seek a drastic cut in government spending as a condition for the credit limit hike.

economist Steve Pressman explains what the debt ceiling is and why we have it – and why it’s time to abolish it.


1. What is the debt ceiling?

Like the rest of us, governments have to borrow when they spend more money than they receive. They do this by issuing bonds, which are promissory notes that promise to pay back the money in the future and make periodic interest payments. national debt is the grand total of all this borrowed money.

the debt ceilingwhich one Congress established a century ago is the maximum amount the government can borrow. It is a limit for the national debt.


2. What is the national debt?

On January 10, 2023, US national debt was $30.92 trillionabout 22% more than that value of all goods and services produced in the US economy this year.

The government actually owes about a quarter of that money. The Social Security Administration has accumulated a surplus and is investing the extra money currently $2.8 trillion, in government bonds. And the Federal Reserve holds $5.5 trillion in US Treasuries.

The rest is government debt. From October 2022, Abroad, companies and individuals owned $7.2 trillion in U.S. Treasury bonds. Japan and China are the largest holders at around $1 trillion each. The rest is owed to US citizens and corporations, as well as state and local governments.


3. Why is there a credit limit?

Before 1917, Congress authorized the government to borrow a fixed amount of money for a specified term. When the loans were repaid, the government could not borrow more without asking Congress for approval.

The Second Liberty Bond Act of 1917, the created the debt ceiling, changed that. It allowed continuous debt restructuring without Congressional approval.

Congress enacted this measure so then-President Woodrow Wilson could spend the money he felt necessary to wage World War I without waiting for action from often-absent lawmakers. Congress, however, didn’t want to give the president a blank check, so it capped borrowing at $11.5 billion and mandated legislation for any increase.

The Debt Limit has been increased dozens of times since then and repeatedly suspended. The last change was in December 2021, when it was raised to $31.38 trillion.


4. What happens when the US hits the ceiling?

Currently, the US Treasury has less than $400 billion Cash on hand and the US government expects to borrow around $100 billion every month this year.

As the US nears its debt ceiling, the Treasury Secretary – currently Janet Yellen – may “Exceptional Measures‘ to save cash, which she said would start on Jan. 19. One such measure is Temporarily not funding retirement programs for government employees. The expectation will be that once the ceiling is raised, the The state would make up the difference. But that will only buy a small amount of time.

If the debt ceiling is not raised before the Treasury has exhausted its options, decisions will have to be made about who will be paid with the day-to-day tax receipts. Another loan is not possible. Government employees or contractors may not be paid in full. Loans to small businesses or students could be stopped.

If the government can’t pay all of its bills, it’s technically behind. Politician, Economists and Wall Street fear a disastrous financial and economic crisis. Many fear that a sovereign default would have dire economic consequences—rising interest rates, panic in financial markets, and perhaps an economic depression.

Under normal circumstances, once the markets panic, Congress and the President act. This did something happen 2013, when Republicans tried to use the debt ceiling to invalidate the Affordable Care Act.

But we no longer live in normal political times. The major political parties are more polarized than everand the concessions McCarthy made to right-wing Republicans could make it impossible to reach an agreement on the debt ceiling.


5. Is there a better way?

A possible solution is a Loophole allowing the US Treasury Department to mint platinum coins of any denomination. If the US Treasury minted a $1 trillion coin and deposited it into its Federal Reserve bank account, the money could be used to pay for government programs or repay government bondholders. This could even be justified by invoking Section 4 of the 14th Amendment on the U.S. Constitution: “The validity of the United States national debt … shall not be questioned.”

Few countries even have a debt ceiling. Other governments operate effectively without them. America could too. A debt ceiling is dysfunctional and routinely puts the US economy at risk due to political swagger.

The best solution would be to abolish the debt ceiling altogether. Congress has already approved the spending and tax bills that require more debt. Why should she also have to approve the additional borrowing?

It should be remembered that the original debt ceiling was introduced because Congress could not quickly meet and approve the spending needed to wage a war. In 1917, crossing the country was done by rail, which took days to get to Washington. That made sense back then. Today, with Congress able to vote online from the comfort of their own homes, that is no longer the case.

This is an updated version of a Article published first on July 18, 2019.The conversation

By Steven Pressmanpart-time professor of economics, The new school

This article is republished by The conversation under a Creative Commons license. read this original article.

https://heavy.com/news/why-america-has-a-debt-ceiling/ Why America has a debt ceiling: 5 questions answered

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